European Commission's Preliminary Report on the E-commerce Sector Inquiry

Competition and Market Regulation Update

On 15 September 2016, the European Commission published its Preliminary Report on the E-commerce Sector Inquiry. Although the Report is preliminary, its findings already highlight concerns on the part of the European Commission that global retailers and other companies that are active in the sector should be aware of and give cause to reconsider some distribution strategies. When final, the Report is also likely to lead to change in a variety of areas in and beyond antitrust that impact e-commerce across the European Single Market.

In this update, we explain the key features of the Preliminary Report, the potential impact of its major findings on the sector and expected next steps.

Background

The European Commission's Digital Single Market Strategy was designed to put Europe at the forefront of the digital economy - to do so it recognised the need to reduce barriers to cross-border e-commerce within the EU.

As a result, the Commission has been carrying out a Sector Inquiry to consider the magnitude of those barriers and the EU competition rules that affect them. This is much needed given that the Commission has not adopted an infringement decision on a purely vertical agreement since 2005. The current EU rules pre-date the revolution in retail brought about by the growth of on-line trading and, for some time, there have been concerns that these rules (namely the vertical block exemption and guidelines) are now not fit for purpose. The rules are simply not suitable for analysing competition problems arising from e-commerce and that national competition authorities (NCAs) have been grappling with difficult e-commerce related issues and often, as in the case of MFNs between hotels and online travel agents, reaching inconsistent decisions.

On 15 September 2016, the Commission published its Preliminary Report on the Sector Inquiry (the "Report"). Whilst the Report is preliminary and the final report will be published in the first quarter of 2017 once the Commission has canvassed interested stakeholders, it does identify specific business practices that may limit online competition which should motivate companies to reassess the legality of their distribution strategies. Equally, the Report underlines concerns that the Commission raised earlier in the year about geo-blocking and other forms of discrimination on the grounds of nationality, residence or establishment.

Key features

This note deals with the Report's preliminary conclusions on the impact of antitrust laws on e-commerce. However, when final, the Report is likely to lead to change in a variety of areas beyond antitrust that impact e-commerce across the Single Market including:

new EU legislative proposals on contracts for the supply of digital content and on-line and distance sale of goods

cooperation between national authorities in the enforcement of consumer protection laws

improved cross-border parcel delivery

simplified VAT regimes, and

copyright modernisation.

(i) E-commerce of Consumer Goods

Price transparency: competitor tracking

The Commission has found that price transparency is a double edged sword. On the one hand, it intensifies price competition - more than half of retailers track competitor pricing and almost 70% use automatic tracking programmes. On the other hand, this increased price transparency could damage competition if it facilitated collusion between retailers.

On-line free-riding

Switching between online and offline sales channels is increasingly common and customers will often tailor their shopping experience to get the best of both worlds. For example, customers may use pre-sales services offered at a bricks and mortar shop and then purchase the product online. This means that the on-line retailers benefit from the presence of bricks and mortar operators, but incur none of the costs associated with a physical presence and so is able to undercut them. The Report confirms that this form of 'free riding' by on-line retailers is a major concern for many manufacturers and retailers, who may seek to deal with this by granting exclusivity and creating selective distribution systems with the aim of creating the right incentives for retailers to increase their sales efforts. Almost half of the manufacturers using selective distribution reported that they do not allow online operators who have no physical presence to join their selective distribution network.

Expansion of selective distribution

Selective distribution is, therefore, increasingly commercially relevant and the Commission is looking at the arrangements that suppliers currently have in place. The Report indicates that certain clauses in existing agreements may go beyond what is necessary to achieve the goals of selective distribution, although interestingly it has indicated that it does not consider a ban on reselling on marketplaces such as Amazon Marketplace and eBay to represent hard-core restrictions of competition law. Nonetheless, manufacturers need to be able to justify such restrictions under Article 101(3), in relation to their particular products and distribution system, including whether they themselves sell on these or similar marketplaces (as was found to be the case in the German Adidas investigation).

Contractual sales restrictions

The Report analyses contractual sales restrictions which the Commission states that manufacturers have increasingly imposed as a response to on-line competition. These include pricing restrictions, restrictions on on-line sales and/or restrictions on cross-border sales. Not all of these are unlawful - price recommendations, which are lawful provided that they really are recommendations and are not enforced, are provided by 80% of manufacturers to their distributors. Interestingly, while a third of retailers normally comply with recommendations, more than a quarter never do so. On the other hand, restrictions such bans on cross border sales and on the use of the internet are unlawful or - as in the case of restrictions on the use of online marketplaces (mentioned above) - require individual consideration. The Commission also encountered restrictions on retailers' ability to use price comparison tools, which also need to be assessed on a case by case basis.

Furthermore, the Commission seems particularly concerned with the power of retailers. Manufacturers reported that retailers put them under pressure to guarantee their profit margins, compensate for losses or lower profits than expected, and otherwise ensure that a specific minimum price is applied throughout the distribution network.

(ii) E-commerce of Digital Content

Contractual restrictions including geo-blocking

The Commission took as its starting point that securing attractive digital content that can be exploited across borders is a prerequisite for content providers. The internet has not changed the way in which content owners license their rights which are still split by technology, territories and release windows and may be exclusive and limited in time.

The Report separately addresses geo-blocking since, across the EU, 70% of respondent digital content providers have implemented at least one type of geo-blocking measure, particularly in agreements for films, sports and TV series. The Commission is separately carrying out antitrust investigations into several TV film studios and video games suppliers regarding territorial restrictions in their agreements and, as mentioned, the Commission has already announced action on geo-blocking.

Duration of licensing agreements and contractual relationships

Licence agreements need to be assessed on an individual basis under EU competition law by reference to the dynamics of the product and geographic markets in question. However, the Commission refers to the fact that markets may be foreclosed by long-term exclusive agreements granted by right holders, particularly when they include clauses that may extend exclusivity (such as automatic renewal or first negotiation clauses).

Next steps

The publication of the Report triggers the opening of a two month public consultation. During this period, stakeholders may comment on the Report and the Commission is expected to publish a Final Report in the first quarter of 2017.

However, this may well not be the Commission's final word in the area of e-commerce - some of the Commission's comments, notable about the growing strength of certain large retailers and increased pressure they are exercising on manufacturers to guarantee profit margins or otherwise ensure a minimum retail price; and restrictions on online sales, seem to signpost the possibility of further anti-trust enforcement investigations, and so possible fines, ahead. Furthermore, the Commission specifically states that, as a follow-up to the inquiry, it may investigate further the compatibility with EU antitrust rules of practices such as pricing restrictions, restrictions on online sales and territorial restrictions and possible anti-competitive provisions in selective distribution agreements restricting online sales.

With this in mind, companies should consider carefully whether vertical restraints that affect online selling and distribution/retailing through digital platforms which are intended to encourage retailers to invest in high quality services, to prevent free riding and/or to protect the image of the products being supplied are necessary to achieve those objectives and whether they can be achieved by other less restrictive alternatives.

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